By Gus McCubbing
Two months ago, tourism and travel stocks were in disarray. The Trump administration’s crackdown on travellers into the United States and a worsening Middle East conflict had many investors wary of backing a sector that had barely recovered after the COVID-19 pandemic.
Now – as the uncertainty recedes, somewhat – big investors are scouring the sector hoping to find a bargain. Locally listed travel businesses are also being helped by a surprisingly enduring boom in tourism. Figures published by the Australian Bureau of Statistics show a 20.1 per cent increase in the number of short trips taken in May compared to the same time last year.
“We think the travel space is very interesting over the next 12 months given valuations have come back to lower levels. We think there’s quite a bit of upside for the sector overall,” said Wilson Asset Management portfolio manager Tobias Yao.
“The rate cuts will be a net benefit for domestic sentiment. And lots of the sector trades together – if you have one or two green shoots, that benefits the sentiment for everyone.”
Not everyone is convinced. Travel stocks, from Corporate Travel Management and Flight Centre to Kelsian, which operates tourism assets including Captain Cook Cruises in Sydney and the K’gari Beach Resort north of Brisbane, remain among the most shorted on the ASX.
Flight Centre chief financial officer Adam Campbell said the past year was “fairly turbulent” for the sector, cutting short the post-pandemic rebound.
“Historically, travel has proven to be a very resilient sector, with Australian outbound departures typically growing year-on-year over a long period of time,” he said.
“We expect this well-established pattern will continue [this] year, although it is impossible to predict the overall growth rate. Growth will be higher if political tensions ease and consumer confidence increases.”
That pessimism is reflected in their share prices. Kelsian is down 26.2 per cent over 12 months, while Flight Centre is down 42 per cent on highs of $22.45 reached in late September, with travel agency rival Helloworld down 38.3 per cent in the last year.
The one bright spot is the airlines, with Qantas shares surging 82 per cent in a year while Virgin Australia, which listed on June 24, is comfortably above its $2.90 per share offer price at $3.22.
“Qantas has had a good run, but we still like it,” said Sage Capital portfolio manager Kelli Meagher. “We think the valuation multiple between Virgin at around 30 per cent is appropriate and prefer to own the market leader.”
Meagher also liked Corporate Travel, which in May warned of a $30 million hit to earnings and revenue expected to be 4 per cent softer than forecast because of Trump’s tariffs, and, to a lesser extent, Flight Centre.
“Flight Centre looks cheap on the surface as it’s trading at a much lower multiple than Corporate Travel. However, it’s a much more complex business, and the leisure business remains the wildcard,” she said.
“Delayed travel due to Middle East conflict and travellers booking holidays to Asia over the US or Europe may pressure margins in the short term.”
Wilson Asset Management’s Yao said he had increased his exposure to hotel aggregator business Web Travel Group in the last three months, along with Corporate Travel. He was also positive about the prospects for Kelsian, which is simplifying its business by selling some assets.
He is not alone in backing Web Travel. Macquarie analysts said the company was its preferred choice in travel and transport, suggesting shares could rise 29.5 per cent to $6.19. In a note, those analysts said its earnings would be more stable than others given lingering economic volatility.
On the other hand, Morningstar on Monday named hotel booking software company SiteMinder in its top stock picks. It has fallen 23.3 per cent this year to $4.58, which puts the stock below its 2021 float price of $5.10. The broker has placed a “fair value” target of $10 on the stock.
“We see better relative value in some oversold names, including SiteMinder. While its hotel customer base is economically sensitive, we believe its margins are more resilient than the market assumes,” said Morningstar analysts Roy van Keulen and Shaun Ler.
“At roughly double the size of its closest competitor, we think SiteMinder is well-positioned to outcompete subscale players in an economic downturn.”
Overseas, tourism numbers aren’t looking quite as rosy. The United States is on track to record a 9 per cent drop in international arrivals this year, and a $US8.5 billion ($13.1 billion) fall in spending relative to last year, according to the latest forecast from Tourism Economics.
A significant driver in the fall is the smaller number of visitors from Canada, after former prime minister Justin Trudeau urged Canadians not to visit the US amid the threats of tariffs.
Atlas Funds Management chief investment officer Hugh Dive said investors should remain wary of travel stocks, including Qantas and Virgin, given their high volatility and exposure to global downturns.
“Qantas is as good as its gets, but running airlines is a very tough business,” Dive said. “The current share price is pretty ridiculous given the vast capex bill that Alan Joyce has left his successor and, eventually, you have to pay the piper.
“As for Virgin, they’ve gone bankrupt twice, right? I’ve seen that movie before and it doesn’t end well for shareholders. They may do well for a few years, but I think Qantas will end up strangling them again.”
However, IG market analyst Tony Sycamore listed Qantas and Corporate Travel as his best travel stock buys, with Flight Centre and Helloworld the weakest options, due to reduced margins and increased completion from platforms like Google Flights, along with fears of Trump’s immigration checks and border security measures.
“While a bounce back to $16 is possible (it closed at $12.98 on Monday), it appears that Flight Centre’s glory days are now well behind it,” he said.
